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Fund manager Anthony Bolton believes a revival in the Chinese A-share market next year and a raft of new stocks will help boost the performance of the Fidelity China Special Situations investment trust.

The manager of the lagging trust said the main factor he is looking for to turn around his fortunes next year is the local A-shares market.

‘It’s been in a bear market for three years,’ said Bolton (pictured). ‘What will change the A-shares market? The economic cycle is in its favour, and at least we now know who the new leaders are. Valuations are also low, and sentiment is negative.’

Bolton concedes H-shares – those listed in Hong Kong – and red chips have outperformed A-shares significantly, with the exception of the MSCI Overseas China Index, down nearly 15% this year, to which he also has exposure.

‘Performance has been tough….it has been a down market, the bias to small and mid-cap stocks,’ said Bolton. ‘Consumer-related stocks have been underperforming in the slowing of the economy; it’s tended to be the defensive payers globally that have done better – although this will change next year.’

At the end of October, since inception in April 2010, the trust’s share price is down 21.8%, while the NAV is down 18.3%, versus the MSCI China Index’s -6.3%.

Healthcare bet

The manager said his overweight to consumer discretionary and healthcare companies have also hit the trust. ‘[Healthcare] is one of my biggest bets and one of my poorest areas, but it looks very interesting going forwards,’ he said.

In terms of the new stocks he has bought recently, Bolton said he has invested in unlisted company Alibaba, an internet firm with a ‘leading e-commerce platform in China,’ that has also been held by Fidelity’s Private Equity fund for around 10 years.

Another company he has bought recently is 21 Vianet. ‘It’s a hardware business that is the biggest independent provider of data storage….with growth of the internet, demand for server and storage is increasing.’

In the financial services sector, Bolton bought Haitong Securities earlier this year. ‘Financial services are very under developed in China and so is the bond market very under-developed. With de-regulation, [they] want to shift more out of banks into bonds.’

Governance is an issue

However, governance can be an issue with small and medium companies, especially in mainland China.

‘I’ve always liked medium and small companies, because they are less well researched,’ said Bolton. ‘If you buy in China, focus on private rather than the state owned firms, which are dominated by large caps.’

He added: ‘State owned are probably less risky but they’re not there to maximise shareholder returns. Smaller caps are there over the next three to four years, but if the economy is bad, they are more risky.’

In order to mitigate potential governance issues, Bolton’s team does substantial research, he says, while he also works with half a dozen other firms to do in-depth historical data about people who run these companies and whether they have been convicts, or have conflicts of interest, for example.

However, the manager has held stocks such as Gome Electrical Appliances, where the former chairman was jailed for bribery and insider trading but was still a large shareholder in the company.

I thought the idea was to bring Bolton in to beat the market, not to blame it. Plenty of opportunities out there but he hasn't grabbed them. Maybe Alibaba will get him out of jail, it has huge potential if it can develop its revenue streams through business facilitation.

CSS fund has one of the most generous performance bonuses around. Making a sustained loss is one way to fix a fee model that is very poor value for the customer. That said I would rather they cease the loose-loose approach and simply reduce the performance bonus kicks.